This series of blogs describes how SAP Financial Consolidation, Starter Kit for IFRS has been configured to meet International Financial Reporting Standards (IFRS).
After an introductory blog you can consult here, we will now focus on IAS 1 Presentation of Financial Statements.
IAS 1 prescribes the basis for presentation of financial statements that should comprise:
- A statement of financial position,
- A statement of profit or loss and other comprehensive income
- A statement of changes in equity,
- A statement of cash flows and
For each statement, except for the statement of cash flows for which IAS 1 refers to the dedicated standard IAS 7 (see blog # 3), IAS 1 gives overall guidance and lists minimum disclosures to be presented. However, it does not prescribe any format.
This blog briefly presents the main requirements of IAS 1 and the way they have been taken into account in the starter kit. For a more detailed analysis, including a presentation of the financial statements as they are delivered in the starter kit, we encourage you to consult the comprehensive document “How SAP Financial Consolidation starter kit for IFRS meets IFRS” that will be published soon.
Statement of financial position
IAS 1 gives a list of minimum disclosures and additionally requires presenting separately current and non-current items.
In practice, the main issue lies in combining both requirements thus determining which items listed as minimum disclosures (e.g. “trade and other payables”) should be split because they may contain both current and non-current items.
In the starter kit, the distinction between current and non-current items is made through the chart of accounts. To determine which items have to be split into current and non-current part, our analysis has been based on the list of mandatory line items (IAS 1, § 54) on one hand and the definition of current items (IAS 1, § 66 & 69) on the other hand.
As regards the presentation of the statement of financial position, the list of minimum disclosures – which is quite long – combined with the current / non-current classification, gives good guidance to propose a standard format.
The statement of financial position delivered within the starter kit complies with the IAS 1 list of minimum disclosures except that it does not include dedicated line items for the non-current portion of current tax assets or liabilities. The reason is that, even if non-current portion of current tax assets or liabilities may exist, it is quite uncommon in practice. Moreover such assets and liabilities should be significant enough to be presented separately which is even more uncommon.
Statement of profit or loss and other comprehensive income
IAS 1 requires presenting all items of income and expense recognized in a period either in a single statement or in two separate statements.
The starter kit complies with these requirements providing three statements for reporting comprehensive income:
- a single statement of profit or loss and other comprehensive income,
- a separate statement of profit or loss and
- a statement of other comprehensive income, beginning with profit or loss and displaying each component of other comprehensive income.
Profit or loss
The statement of profit or loss delivered within the starter kit meets the minimum line items required by IAS 1 except for those that have been introduced by IFRS 9 (because this standard – which will become mandatory in 2015 – is not implemented in the starter kit).
As regards P&L items, expenses are analyzed by function, which is the most commonly used analysis. Given the lack of detail in IAS 1, the statement of profit or loss provided in the starter kit is based on the IFRS taxonomy as regards the components of operating profit.
Other comprehensive income (OCI) – requirements
According to IAS 1 §7, OCI comprises items of income and expenses that are not recognized in profit or loss as required or permitted by other IFRSs. The OCI section should present line items for amounts of other comprehensive income in the period, classified by nature and grouped into those that will not be reclassified subsequently to profit or loss, on one hand, and those that will be reclassified subsequently to profit or loss when specific conditions are met on the other hand.
Referring to the other IFRSs (except for IFRS 9 which is not addressed by the starter kit), components of OCI can be listed as follows:
Reclassification adjustments must be disclosed (in the statement or in the notes) as well as the income tax relating to each component (including reclassification adjustments).
The share of OCI of associates and joint ventures accounted for using the equity method should be presented separately. OCI relating to non-current assets and disposal groups classified as held for sale should also be presented separately from other OCI.
Other comprehensive income (OCI) – in the starter kit
As regards OCI, the first issue regards the identification of OCI items. Unlike P&L items, components of OCI are not booked in dedicated accounts in the general ledger; they are credited directly to equity. Therefore, they have to be identified from all the movements recognized in equity during the period.
To meet these requirements, the solution implemented in the starter kit is to use dedicated equity accounts to identify components of OCI. Each component of OCI corresponds to two dedicated equity accounts, one for the before-tax amount and one for the related tax effect.
For the purpose of reporting comprehensive income, these accounts are associated to one or more flows, depending on whether they may be reclassified to profit or loss (“recycled”). For instance, the account “Fair value reserve, before tax” is associated to flow F55 for entering the period variation and to flow F30 for recycling when the underlying financial assets are sold.
Data displayed in the comprehensive income is calculated by consolidation rules (except for the OCI relating to non-current assets and disposal groups classified as held for sale that should be populated by a manual reclassification entry from other line items) which establish the link between the account/flow/entity selection and the corresponding rows of the statement. Dedicated reports can be used to drill down from consolidated data displayed in the statement of comprehensive income to the breakdown by original accounts / flows.
Statement of changes in equity
IAS 1 lists minimum disclosures to be presented in the statement of changes in equity. However, it does not define what the different components of equity should be. Nor does it list all categories of changes that may affect the different components of equity.
In the starter kit, the components of equity displayed in the statement of changes in equity are the following:
- Issued capital
- Share premium
- Treasury shares
- Other reserves
- Retained earnings
- Non-controlling interests
Based on the presentations commonly used by companies, reconciliation between opening and closing shows the following items:
- Changes in accounting policies
- Profit or loss
- Other comprehensive income
- Issue of shares
- Dividends paid
- Issue of convertible notes
- Share-based payments,
- Purchase and disposal of treasury shares,
- Transactions with non-controlling interests and
- Other movements.
Data displayed in the statement of changes in equity is calculated by consolidation rules and can be analyzed, via dedicated reports, to retrieve the underlying account / flow pairs.
According to IAS 1, notes should:
- Present information about the basis of preparation of the financial statements and the specific accounting policies,
- Disclose the information required by IFRSs that is not presented elsewhere in the financial statements,
- Provide any information that is relevant.
IAS 1 does not provide a comprehensive list of required disclosures. These are listed by topic in each IFRS.
As disclosures required by IFRS are very numerous and as it is difficult to select those which are common to all entities, disclosure requirements have not been included in the starter kit.
In the next blog, we will focus on the Statement of Cash Flows (IAS 7).